Story: Economic thought

Page 8. Global economic thinking

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New Zealand economists overseas

Over the 1940s the international centre of economic thinking moved from Europe to the United States. New Zealand academic economists directed their publications to American journals. Increasingly postgraduate training was in the United States. Economists were to be found in the US rather than the United Kingdom. John Condliffe’s earlier move to Berkeley in California in 1939 was a sign of the times.

However for a time there were some prominent New Zealand economists in Britain. Ronald Meek became a leading figure in the history of economic thought. He studied the 18th-century French economists, the Physiocrats, who were among the originators of laissez-faire economics and minimal government intervention in economies.

Rex Bergstrom, based at the University of Essex, made major contributions to early econometrics. The best-known New Zealand-born economist was Bill Phillips. He became known for his work in Britain on the relation between unemployment and inflation. He used his skills in electrical engineering to build the MONIAC (Monetary National Income Analogue Computer), a machine which illustrated some emerging principles of economic interdependence – although (as he knew) computers were about to make it superfluous.

In recent decades, the best-known expatriate economists – Stephen Turnovsky and Peter Phillips – have worked in the US.

New ideas

The main changes in international economic thinking were responses to major changes in society. The political cohesion that had developed as a response to the depression and the Second World War changed over time. The boom years of the 1950s and 1960s gave way to economic stagnation and inflation in the 1970s. Government spending was increasingly questioned.

Intellectual advances, mostly in the US, on the boundaries of mathematical economics and the off-shoot field of finance, made it possible to calculate the values of new financial instruments. Since the 1930s the standard response to managing financial risk had been to socialise it – to give governments responsibility to look after risk. Then it became possible to manage risks through futures markets, which predict future incomes and spread the risk that these fail. Financial liberalisation – unregulated markets – was the result. This worked well until the 2008 world financial crisis, which demonstrated that markets do not always manage risk well.

Market forces

Growing economies gave new impetus to economic thinking. Developing markets emphasised the role of incentives, especially prices, in driving consumer behaviour. Within certain constraints, consumers were seen as economically rational decision-makers. It followed that prices should not be distorted by government interventions, but should be determined by markets. This had been the core of economic thinking since Adam Smith in the 19th century, but successive governments had ignored it after the 1930s.

Rogernomics

 

Roger Douglas was minister of finance in the Labour government from 1984 to 1988. His brand of new right economic thinking involved liberalising international trade, deregulating industrial, agricultural, finance and labour markets, widespread corporatisation and privatisation of government activities, and social welfare reform and tax system reform. His views echoed Gladstonean liberalism in the Victorian era. These policies were continued by the incoming National government in 1990. The policies were labelled Rogernomics, but the economic thinking was an adaptation of overseas thought.

 

When New Zealand faced significant economic issues in the 1980s, economists, especially those in the treasury, provided analysis about New Zealand’s economic future in the light of contemporary developments in international economic thinking. The embrace of globalisation and a free-market economy was the result. To people wedded to decades of trying to solve New Zealand’s structural economic problems through government spending these treasury officials appeared ideologues, but genuine analysis depended on understanding economics.

Environmental economics

Over the 1970s environmental concerns became more prevalent. Economic theory – most notably that regarding externalities – was increasingly used in assessing the costs and benefits of large development proposals, such as the aluminium smelter proposed for Aramoana near Dunedin. Externalities are costs or benefits for which no one pays any financial price in a market, for example air pollution from a factory. Economists were increasingly called on to carry out economic modelling and cost–benefit analysis for large developments.

Scepticism about economic thinking

Economic thinking remains separate from any general attitudes. It is a severely logical style of thinking which is not confined to material welfare. There is a considerable public scepticism about its claimed expertise. Because economics deals with areas in which some experience is common, and where private interests are deeply affected, economists have difficulty establishing the boundary of their specific knowledge.

With its tradition of drawing feely on imported knowledge, and its history of drawing on popular thinkers for a social vision, New Zealand finds it especially problematic to find the appropriate boundaries around economic thinking.

How to cite this page:

Gary Hawke, 'Economic thought - Global economic thinking', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/en/economic-thought/page-8 (accessed 22 November 2019)

Story by Gary Hawke, published 11 Mar 2010